Goldman sounds the China alarm and cuts metals outlook

By Bloomberg News

Updated 07 Jan 2019 — 5:41 PM, first published at 5:40 PM

Goldman Sachs chopped back its near-term metals forecasts as China's economy has "decelerated notably," while balancing that outlook with a prediction mainland policy makers will respond by stoking expansion in the second half, aiding a revival in copper and aluminum.

The bank — which had been consistently bullish on raw materials heading into 2019 — now sees copper at $US6100 ($8550) a metric tonne in three months and $US6400 in six, down from earlier forecasts of $US6500 and $US7000, according to an emailed report received on Monday. The 12-month target was held at $US7000.

Given the political importance of the growth target in China, "policy will need to ease in order to offset the weakness in many parts of the economy," analysts including Hui Shan said in the January 4 note. Infrastructure investment growth is expected to accelerate to 10 per cent in 2019 from 4 per cent last year, and annualised quarterly GDP growth will increase, they said.

Goldman Sachs has sounded its China alarm and chopped back its near-term forecasts for metals on the back of a "notably" slowing economy. QILAI SHEN

Metals from copper to zinc were battered in 2018 by global trade tensions and a rising dollar. More recently, China's domestic slowdown has played the leading role in spurring bearishness, with the official manufacturing index sliding into contraction territory in December for the first time since 2016. Demand in Asia's largest economy "has no doubt weakened," Goldman said.

"We expect metals to stay under pressure in the first quarter," the analysts said. "The experience of the 2015-2016 downturn also implies that, in uncertain times, investors may want to see concrete signs of demand strengthening before taking long positions," they said.

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On Friday, China's central bank announced another cut to the amount of cash lenders must hold as reserves in a move to release a net 800 billion yuan ($164 billion) of liquidity and offset a funding squeeze ahead of the Chinese New Year. After the move, UBS Group said it expects additional easing as growth slows, including tax cuts and increased fiscal spending.

In its nickel outlook, Goldman made substantial cuts, citing plans for low-cost Indonesian supply. "Although it remains to be seen whether these projects can be finished on time and within budget, they have the potential to be a game changer," it said. The bank sees nickel at $US12,500 in 12 months, from $US18,000.